Fannie Mae Guidelines for the Appraiser
The Federal National Mortgage Association (Fannie Mae) is a Government Sponsored Enterprises (GSEs), which means it is backed by the government but they are not part of the government. Fannie Mae does not directly offer mortgage loans but instead buy the mortgages from banks, credit unions, and other financial institutions so that they, in turn, can lend to more homeowners. Fannie Mae holds the lender responsible for the accuracy of both the appraisal and its assessment of the marketability of the property. It is imperative for a lender’s underwriters to understand the appraisal process and their relationship to the appraiser.
Some of the Fannie Mae guidelines we would like to cover in this article are the areas regarding the subject verses the comparable properties. Comparable selection will determine the market value and typically this is the area in which most lenders and/or clients need clarification or additional items need to be addressed.
In an ideal world an appraiser would have comparables within the same neighborhood of the same style, square footage, age, lot size, updates/upgrades, exterior amenities, bedrooms/bathroom count, condition and quality of construction. Unfortunately, this NEVER happens. So, upon comparable selection an appraiser chooses properties that are the most reflective of the subject property while also conforming to the wide array of lender and/or Fannie Mae guidelines. These guidelines may have an impact on the appraised value. The following are some of the areas addressed in a report.
– Settled Dates
- Fannie Mae, lenders and/or clients prefer the selection of 2 properties that have settled within the past 90 days.
- Older comparable sales that are the best indicator of value for the subject property can be used if appropriate.
- Comparable sales that are more than six months old must be must be accompanied by an appraiser explanation for use.
- A minimum of 3 comparable sales that have been settled or closed within the last 12 months must be reported as part of the sales comparison approach to value.
- Comparables within one mile are typically the standard for lenders and/or Fannie Mae.
- This is typically achieved in a populated suburban or urban area during a season of typical turnover.
- Problems with this guideline occur when and the property is located in a rural area.
- Rural properties often have large lot sizes and rural locations can be relatively undeveloped; therefore, there may be a shortage (or absence) of recent truly comparable sales in the immediate vicinity of a subject property that is in a rural location.
- Comparable sales located a considerable distance from the subject property can be used if they represent the best indicator of value for the subject property.
- The appraisal must include an explanation of why the particular comparables were selected. Other factors for the lack of comparable properties within a mile are square footage of dwelling, updates/upgrades, style, bedroom/bathroom count, finished basement and presence of an in ground pool are just a few reasons this one mile stipulation would need to be expanded and commented on in the report.
– Land Value exceeding 30% of market value
- The site value is typically required in an appraisal report, with or without the cost approach being included.
- If this land to market value percentage/ratio exceeds 30% a comment is warranted. This is often the situation on large parcels of land or water front lots.
In selecting comparables Fannie Mae, clients and/or lender would prefer the of use the bracketing method. Bracketing is a method of using at least one comparable superior and one inferior to the subject. It is preferred to use as many bracketed items as possible:
- Unadjusted Sale Price
- Adjusted Sale Price
- Gross Living Area (GLA)
- Lot Size
- Adjusted Sale Price
- Ground Rents
- Other Major Physical Characteristics
– Gross Living Area (GLA) Square Footage
- Comparables within 20% of the subject are preferred. Anything beyond that typically warrants additional commentary.
- Differences less than 100 square feet are not usually adjusted.
– Bedroom Count
- Similar bedroom count is most appropriate.
- Typically, at least two comps should have same bedroom count.
- One more or fewer bedroom is ordinarily acceptable for 3+ bedroom homes.
- Two bedroom homes being appraised should have one or more two-bedroom comparables.
- Three and four bedroom homes can usually be compared with appropriate commentary and availability in the market.
– Predominant Value
- The appraiser must indicate the price range and predominant price of properties in the subject neighborhood.
- The price range must reflect high and low prevailing prices for the property type being appraised.Isolated high and low extremes should be excluded from the range, which means that the predominant price will be that which is the most common or most frequently found in the neighborhood.
- The appraiser may state the predominant price as a single figure or as a range, if more appropriate.
- When the value of the subject property is significantly different than the noted predominant value of the neighborhood, the appraiser must explain why the value is outside the range and comment on the marketability of the property.
– Homes of Different Styles
- The appraiser is required to state the architectural Design/Style of the subject and comparables.
- Design descriptions include colonial, cape cod, split level, split foyer, contemporary, etc.
- Fannie Mae and/or the lender require the appraiser to provide at least one closed sale that has the same (or similar) design style as the subject, even if it is necessary to extend the search parameters(in time or distance).
- If absolutely no such closed sale is available, even after extending standard search parameters, specific commentary MUST be provided describing the research efforts and search parameters.
- Comparable sales that include sales or financing concessions must be adjusted to reflect the impact, if any, on the sales price of the comparables based on the market at the time of sale.
- Particular attention must be paid to sales or financing concessions in markets that are experiencing declining property values, an oversupply of properties, or marketing times over six months.
- Most lenders have guidelines wanting appraisers to stay within a one-mile radius, but there is actually no official “one-mile rule” from Fannie Mae.
- Urban areas (densely populated) typically have comparables within 1 mile.
- Rural areas where there are minimal settled sales area available there is no distance rule.
- Comments and explanations of market areas are typically required if the distance to the subject exceeds 1 mile in an urban area and 5 miles in a rural area.
- Distance is irrelevant if it takes distance to create a credible appraisal.
There are Fannie Mae and/or lender requirements for each field in an appraisal report to include accuracy, knowledge of the area, determining highest and best use, zoning restrictions, compliance, subject property analysis, comparable property analysis, eligibility criteria, conformity and environmental issues are just a handful of areas that need to be addressed in an appraisal report.
FHA loans differ from Fannie Mae. FHA loans are issued by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA loans are designed for low to moderate income borrowers who are unable to make a large down payment. FHA and Fannie Mae each have their own set of guidelines possibly resulting in varying values.
Additional data and/or requirements for appraisers, lenders, underwriters, mortgage requirements, liability assessments and eligibility requirements can be found at https://www.fanniemae.com and http://www.aamsappraisals.com. Various data from both sites was used in this report regarding appraisal guidelines.